Now the previous statement may not be completely true. But ROAS is still very important.

As a business owner you are hit with many marketing terms. CTR, reach, engagement, to name a few. All of these metrics have meaning but a lot of business owners just want to understand how much money their marketing is generating for their business.

If that sounds like you then, ROAS (return on ad spend) is the metric for you. ROAS measures how much your business earns for every pound spent on ad campaigns. 

For example a ROAS of 4:1 would mean that you are generating £4 in revenue for every £1 spent on ads.

If you want to calculate your own ROAS manually then take a look at the formula below:

ROAS can sometimes be mixed up with ROI. The main difference is that ROAS only focuses on your Ad spend versus your revenue whereas ROI takes into account staff wages,bills, etc. Another common metric used is CPA, or cost per conversion. This issue with this metric is that it only measures the average cost associated with any one, single action.

Let’s take a look at two ad groups below.

Ad Group 1

Ad Group 2

Ad Spend: £100

Ad Spend: £100

Conversions: 1

Conversions: 1

CPA: £100

CPA: £100

Revenue: £50

Revenue: £300

ROAS: 0.5

ROAS: 3

 

Each ad group spent £100 and this led to one conversion, this gives us an identical Cost Per Acquisition of £100. However, when we compare the acquisitions revenue we can see that the two campaigns are not the same. Ad Group 1 generated minus £50 whereas Ad Group 2 generated a profit of £200. As ROAS looks at the revenue generated by the ad spend we can see that the ROAS metric provides us with a clearer picture of these campaigns success and failure.

 

What is a typical ROAS?

After many years of experience and looking online at other articles the answer is somewhere between 4:1 and 5:1. The ratio is dependent on the sector the business is in, the price of their service/product and how well the campaign is setup. 

If your ad campaign ROAS is below 4:1 then its possible that your campaign is failing and needs to be rebuilt or tweaked. If it is below 3:1 then you need to take action as you are spending too much money / missing out on too many new customers.

 

Examples

If we want to look at one of our clients campaigns you can see that their ROAS is 12.34:1.

This client sells items between £10 and £70. So let’s work out how much our ads are costing them as a percentage of the products they sell.

Item Cost

Cost to sell item on average

Remaining

£10

81p

£9.19

£20

£1.62

£18.38

£40

£3.24

£36.76

£70

£5.67

£64.33

 

Another client’s current success can be seen in this case study. They came to us with a ROAS of over 9:1 last year and we have worked with them to further extend the sales generated from their ad spend. 

If you are interested in finding out more about our services and how we can help you to grow your business then contact me on alex@embryodigital.co.uk or call on 07725855206.